Question

Explain the impact of the change in the following factors on today's foreign exchange rate determination. You can answer it with graph.

1. Increase in US, China, EU and etc's demand for Korean exports

2. Firstly, the increase of Korea interest rates level at a given US interest rate level and then, the increase of US interest rate level, assuming no change in Korean interest rate level.

3. Increase in future exchange rate

Answer 1

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Question:

1). Answer:

Increase in US, China, EU and etc's demand for Korean exports.

Increasing demand for Korean exports in these country will increase demand for Korean currency and Korean currency will get appreciate against USD, Yuan, Euro and etc's.

You can see that foreign exchange market is equilibrium at point 'A" but increasing demand for Korean currency and demand curve will shift right from D to D1 and and exchange rate for Korean currency get appreciated against these currencies.

Graph:

Exchange rate : KRW/USD

2). Answer:

Firstly, the increase of Korea interest rates level at a given US interest rate level and then, the increase of US interest rate level, assuming no change in Korean interest rate level.

Normally if all thing remaining the same, increasing interest rate attract more foreign investors and increase foreign capital inflow. Increasing inflow increase demand for local currency and its appreciate domestic currency against foreign currency. In this case in the first phase, the increase of Korea interest rates level at a given US interest rate level and then, the increase of US interest rate level, assuming no change in Korean interest rate leve. Then increasing interest rate in the US will attract more foreign capital and USD will get appreciated.

You can see that foreign exchange market is equilibrium at point 'A" but increasing demand for USD and demand curve will shift right from D to D1 and and exchange rate for USD get appreciated against these currencies or USD will get appreciate.

Graph:

USD as a base currency-

3). Answer:

Increase in future exchange rate.

Increase in future exchange rate (USD/KRW ) will increase demand for USD and USD will get appreciated. Buyrs will buy more USD for making more profits in the future and hedger will also buy more USD also. It will ncrease demand for USD and USD will get appreciated.

You can see that foreign exchange market is equilibrium at point 'A" but increasing demand for USD and demand curve will shift right from D to D1 and and exchange rate for USD get appreciated against these currencies or USD will get appreciate.

Graph:

USD as a base currency-

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